Archive for October, 2015

Both these cases (replicated below) represent the first salvo by the EU Commission to establish that it has the authority, under a State Aid premise, to step into the shoes of the national revenue authority and re-allocate profits of an enterprise according to the EU Commission’s interpretation and analysis of the arm’s length concept.

But importantly, these cases also, I think, exhibit the trepidation of the EU Commission because of several weaknesses in its arguments, and even more so, in the geopolitical ramifications. The trepidation is illustrated by the very low adjustments the EU Commission made – enough to be noticed but de minimis in the context of corporate annual profits, corporate profit accumulation over time (e.g. perpetual deferral), and corporate tax reserves.

Starbucks potential EU alleged 30 million Euro re-capture tax bill, dating back to accumulation from 2008, will – if Starbucks did not challenge the decision up through the EU Court Of Justice which is highly unlikely – be offset by a tax credit of like amount and thus a wash out. To small to be noticeable to Starbucks shareholders or to the US Treasury.

Had the EU Commission found, as it alluded that it is able to, that the State Aid amounted to the hundreds of millions or even a couple billion, the intensity of the EU Commission-National government conflict would have changed, and the EU Commission would have lost that battle with the stakes so high.

More so a danger, the US Treasury would have been forced to act as if a trade war had broken out. Treasury beating up on Starbucks for transfer pricing out of the US tax base is OK because Starbucks in a US company, as far as the US Treasury is concerned. Starbucks represents potential US deficit reduction tax dollars.

Had the EU Commission decided for a large amount, which would have represented a significant subsidy from the US to EU national budgets and/or a significant subsidy from US retirement system shareholders to EU budgets, one might imagine the joint-Republican Democratic Senate hearing called by Washington state’s two Democratic senators Patty Murray and Maria Cantwell. That hearing would conclude a joint statement to Treasury demanding it report back how it intends to implement a tit-for-tat strategy against EU companies to extract an equally amount pulled from the bowels of Starbucks reserves. Throw in enough US multinationals with HQs in the various states such as New York, Illinois, California and Texas, Congress may actually in rare bipartisan stature pass tit-for-tat legislation by year end.

But the EU Commission instead chose to bark loudly but withhold its bite. Probably it has avoided the worst case scenarios of political warfare presented above. With such a small award, the various stakeholders will let the inevitable ECJ process run its course. Or maybe, the US Congress and US Treasury will understand that true ramifications of today’s EU Commission decisions, and even for one US dollar at stake, will go to the mat on behalf of Starbucks, Apple, Microsoft, Google, Amazon etc

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Today the European Commission decided that Luxembourg and the Netherlands have grantedselective tax advantages to Fiat Finance and Trade and Starbucks, respectively. These are illegal under EU state aid rules.

Commissioner Margrethe Vestager, in charge of competition policy, stated: “Tax rulings that artificially reduce a company’s tax burden are not in line with EU state aid rules. They are illegal. I hope that, with today’s decisions, this message will be heard by Member State governments and companies alike. All companies, big or small, multinational or not, should pay their fair share of tax.”

Following in-depth investigations, which were launched in June 2014, the Commission has concluded that Luxembourg has granted selective tax advantages to Fiat’s financing company and the Netherlands to Starbucks’ coffee roasting company. In each case, a tax ruling issued by the respective national tax authority artificially lowered the tax paid by the company.

Tax rulings as such are perfectly legal. They are comfort letters issued by tax authorities to give a company clarity on how its corporate tax will be calculated or on the use of special tax provisions. However, the two tax rulings under investigation endorsed artificial and complex methods to establish taxable profits for the companies. They do not reflect economic reality. This is done, in particular, by setting prices for goods and services sold between companies of the Fiat and Starbucks groups (so-called “transfer prices”) that do not correspond to market conditions. As a result, most of the profits of Starbucks’ coffee roasting company are shifted abroad, where they are also not taxed, and Fiat’s financing company only paid taxes on underestimated profits.

This is illegal under EU state aid rules: Tax rulings cannot use methodologies, no matter how complex, to establish transfer prices with no economic justification and which unduly shift profits to reduce the taxes paid by the company. It would give that company an unfair competitive advantage over other companies (typically SMEs) that are taxed on their actual profits because they pay market prices for the goods and services they use.

Therefore, the Commission has ordered Luxembourg and the Netherlands to recover the unpaid tax from Fiat and Starbucks, respectively, in order to remove the unfair competitive advantage they have enjoyed and to restore equal treatment with other companies in similar situations. The amounts to recover are €20 – €30 million for each company. It also means that the companies can no longer continue to benefit from the advantageous tax treatment granted by these tax rulings.

Furthermore, the Commission continues to pursue its inquiry into tax rulings practices in all EU Member States. It cannot prejudge the opening of additional formal investigations into tax rulings if it has indications that EU state aid rules are not being complied with. Its existing formal investigations into tax rulings in Belgium, Ireland and Luxembourg are ongoing. Each of the cases is assessed on its merits and today’s decisions do not prejudge the outcome of the Commission’s ongoing probes.

Fiat

Fiat Finance and Trade, based in Luxembourg, provides financial services, such as intra-group loans, to other Fiat group car companies. It engages in many different transactions with Fiat group companies in Europe.

The Commission’s investigation showed that a tax ruling issued by the Luxembourg authorities in 2012 gave a selective advantage to Fiat Finance and Trade, which has unduly reduced its tax burden since 2012 by €20 – €30 million.

Given that Fiat Finance and Trade’s activities are comparable to those of a bank, the taxable profits for Fiat Finance and Trade can be determined in a similar way as for a bank, as a calculation of return on capital deployed by the company for its financing activities. However, the tax ruling endorses an artificial and extremely complex methodology that is not appropriate for the calculation of taxable profits reflecting market conditions. In particular, it artificially lowers taxes paid by Fiat Finance and Trade in two ways:

Due to a number of economically unjustifiable assumptions and down-ward adjustments, the capital base approximated by the tax ruling is much lower thanthe company’s actual capital.

The estimated remuneration applied to this already much lower capital for tax purposes is also much lower compared to market rates.

As a result, Fiat Finance and Trade has only paid taxes on a small portion of its actual accounting capital at a very low remuneration. As a matter of principle, if the taxable profits are calculated based on capital, the level of capitalisation in the company has to be adequate compared to financial industry standards. Additionally, the remuneration applied has to correspond to market conditions. The Commission’s assessment showed that in the case of Fiat Finance and Trade, if the estimations of capital and remuneration applied had corresponded to market conditions, the taxable profits declared in Luxembourg would have been 20 times higher.

Starbucks

Starbucks Manufacturing EMEA BV (“Starbucks Manufacturing”), based in the Netherlands, is the only coffee roasting company in the Starbucks group in Europe. It sells and distributes roasted coffee and coffee-related products (e.g. cups, packaged food, pastries) to Starbucks outlets in Europe, the Middle East and Africa.

The Commission’s investigation showed that a tax ruling issued by the Dutch authorities in 2008 gave a selective advantage to Starbucks Manufacturing, which has unduly reduced Starbucks Manufacturing’s tax burden since 2008 by €20 – €30 million. In particular, the ruling artificially lowered taxes paid by Starbucks Manufacturing in two ways:

Starbucks Manufacturing pays a very substantial royalty to Alki (a UK-based company in the Starbucks group) for coffee-roasting know-how.

It also pays an inflated price for green coffee beans to Switzerland-based Starbucks Coffee Trading SARL.

The Commission’s investigation established that the royalty paid by Starbucks Manufacturing to Alki cannot be justified as it does not adequately reflect market value. In fact, only Starbucks Manufacturing is required to pay for using this know-how – no other Starbucks group company nor independent roasters to which roasting is outsourced are required to pay a royalty for using the same know-how in essentially the same situation. In the case of Starbucks Manufacturing, however, the existence and level of the royalty means that a large part of its taxable profits are unduly shifted to Alki, which is neither liable to pay corporate tax in the UK, nor in the Netherlands.

Furthermore, the investigation revealed that Starbucks Manufacturing’s tax base is also unduly reduced by the highly inflated price it pays for green coffee beans to a Swiss company, Starbucks Coffee Trading SARL. In fact, the margin on the beans has more than tripled since 2011. Due to this high key cost factor in coffee roasting, Starbucks Manufacturing’s coffee roasting activities alone would not actually generate sufficient profits to pay the royalty for coffee-roasting know-how to Alki. The royalty therefore mainly shifts to Alki profits generated from sales of other products sold to the Starbucks outlets, such as tea, pastries and cups, which represent most of the turnover of Starbucks Manufacturing.

Recovery

As a matter of principle, EU state aid rules require that incompatible state aid is recovered in order to reduce the distortion of competition created by the aid. In its two decisions the Commission has set out the methodology to calculate the value of the undue competitive advantage enjoyed by Fiat and Starbucks, i.e. the difference between what the company paid and what it would have paid without the tax ruling. This amount is €20 – €30 million for each of Fiat and Starbucks but the precise amounts of tax to be recovered must now be determined by the Luxembourg and Dutch tax authorities on the basis of the methodology established in the Commission decisions.

New investigative tools

In the two investigations the Commission has for the first time used information request tools under a Council decision by Member States of July 2013 (Regulation 734/2013). Using these powers the Commission can, if the information provided by the Member State subject to the state aid investigation is not sufficient, ask that any other Member State as well as companies (including the company benefitting from the aid measure or its competitors) provide directly to the Commission all market information necessary to enable it to complete its state aid assessment. These new tools form part of the State Aid Modernisation initiative launched by the Commission in 2012 to allow it to concentrate its enforcement efforts on aid that is most liable to distort competition.

The fight against tax evasion and tax fraud is one of the top priorities of this Commission. In June 2015, the Commission unveiled a series of initiatives to tackle tax avoidance, secure sustainable tax revenues and strengthen the Single Market for businesses. The proposed measures, part of theCommission’s Action Plan for fair and effective taxation, aim to significantly improve the corporate tax environment in the EU, making it fairer, more efficient and more growth-friendly. Key actions included a framework to ensure effective taxation where profits are generated and a strategy to re-launch the Common Consolidated Corporate Tax Base (CCCTB) for which a fresh proposal is expected in the course of 2016. The Tax Transparency Package presented by the Commission in March also had its first success in October 2015 when Member States reached a political agreement on an automatic exchange of information on tax rulings following only seven months of negotiations. This legislation will contribute to bringing about a much greater degree of transparency and will act as a deterrent from using tax rulings as an instrument for tax abuse – good news for businesses and for consumers who will continue to benefit from this very useful tax practice but under very strict scrutiny in order to ensure a framework for fair tax competition.

The non-confidential version of the decisions will be made available under the case numbers SA.38375 (Fiat) and SA.38374 (Starbucks) in the State aid register on the DG Competition website once any confidentiality issues have been resolved. The State Aid Weekly e-News lists new publications of State aid decisions on the internet and in the EU Official Journal.

On June 1, LexisNexis launched its new online tax research platform called Lexis Advance®Tax.

Already available to America’s law school faculty and students, it includes a rich, comprehensive package of nearly 1,400 sources, including tax news, primary law, journals and nearly 300 treatises, practice guides and forms products for both tax and estates lawyers.

Along with news, another strong area for L.A. Tax is its subpage devoted to International Tax. There, users will find a selection of titles examining hot, cutting-edge issues like: Lexis Guide to FATCA Compliance, the Lexis global guide to anti-money laundering laws around the world, and the recently-revised Foreign Tax & Trade Briefs, 2nd Ed, which provides summaries of each country’s tax system and laws.

All of these titles are produced by a team of tax experts led by Professor William H. Byrnes, Associate Dean, International Financial Law, at Texas A&M University Law School, in Fort Worth, the newest law school in Texas. Seehttps://law.tamu.edu/

Looking for Lexis Advance Tax?
Sign in to www.lexisadvance.com, look for the pull-down menu called “Lexis Advance Research” in the upper-left corner. Click the down arrow and select Lexis Advance Tax.

Old age and survivors, disabled workers and SSI recipients — will not see a COLA increase in benefits next year for the third time since 2009.

But Social Security beneficiaries with higher incomes will see increases in their premiums for Medicare Part B, which pays for physicians’ bills, outpatient care, durable medical devices and other goods and services.

James J. Green explains the impact of the Medicare Part B premium cost increases for Seniors on ThinkAdvisor and the lack of increase of social security benefits.

James Green, Group Editorial Director, Investment Advisor Group analyzes the 2016 coming tragedy for a large segment of retirees – Medicare premiums will surge but the Social Security payment to pay it will not increase one cent. Read his analysis…

The OECD launched its new portal on Automatic Exchange of Information (AEOI). It provides a comprehensive overview of the work of the OECD and the Global Forum on Transparency and Exchange of Information for Tax Purposes in the area of…

Bloomberg reported that the former UBS Swiss banker Hansruedi Schumacher who plead guilty to assisting US clients evade taxes will not go to jail. Instead, he will pay a $150,000 fine and be sentenced to probation in reward for testifying…

Senior members from the OECD’s Centre for Tax Policy and Administration (CTPA) commented on the final outputs of the OECD/G20 Base Erosion and Project Shifting Project, including the next steps and the involvement of developing countries. See yesterday’s post with…

The OECD presented today the final package of measures for a comprehensive, coherent and co- ordinated reform of the international tax rules to be discussed by G20 Finance Ministers at their meeting on 8 October, in Lima, Peru. The OECD/G20…

Vast amounts are lost to illicit financial flows, including tax evasion, money laundering, bribery and corruption. These crimes threaten the strategic, political and economic interests of both developed and developing countries. In a world of limited resources and increasing complexity,…

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Dr. George Mentz writes: “After a review of the top 200 schools in the USA and an analysis of the top business schools and law schools, top educational institutions will either need to innovate or die. …” read his analysis on LinkedIn’s Blog

On June 1, LexisNexis launched its new online tax research platform called Lexis Advance®Tax.

Already available to America’s law school faculty and students, it includes a rich, comprehensive package of nearly 1,400 sources, including tax news, primary law, journals and nearly 300 treatises, practice guides and forms products for both tax and estates lawyers.

Along with news, another strong area for L.A. Tax is its subpage devoted to International Tax. There, users will find a selection of titles examining hot, cutting-edge issues like: Lexis Guide to FATCA Compliance, the Lexis global guide to anti-money laundering laws around the world, and the recently-revised Foreign Tax & Trade Briefs, 2nd Ed, which provides summaries of each country’s tax system and laws.

All of these titles are produced by a team of tax experts led by Professor William H. Byrnes, Associate Dean, International Financial Law, at Texas A&M University Law School, in Fort Worth, the newest law school in Texas. Seehttps://law.tamu.edu/

Looking for Lexis Advance Tax?
Sign in to www.lexisadvance.com, look for the pull-down menu called “Lexis Advance Research” in the upper-left corner. Click the down arrow and select Lexis Advance Tax.

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A TIGTA audit was initiated to assess the IRS’s progress in implementing the FATCA. TIGTA found that the IRS has taken steps to provide information to affected stakeholders that explains the FATCA requirements and expectations.

However, TIGTA identified improvements that are required to ensure compliance and to measure performance for foreign financial institutions. TIGTA also identified some limitations with the processing of paper Forms 8938. Specifically:

Transcribed data are not validated to ensure accuracy.

Data on Form 8938 continuation statements (used to report additional foreign accounts or other foreign assets) are not transcribed.

Losses reported by taxpayers cannot be input as negative amounts.

If these issues are not properly addressed, it could limit management’s ability to make informed decisions and achieve the IRS’s compliance objectives related to the FATCA.

TIGTA recommended that the IRS:

update the compliance activities in the FATCA Compliance Roadmap for identifying noncompliance by foreign financial institutions;

initiate a periodic quality review process for the processing of paper Forms 8938 to ensure the accuracy of the data being transcribed; and

ensure that the transcription issues identified in this report are addressed.

The IRS agreed with the first two recommendations but disagreed with some programming changes related to the third recommendation due to budgetary constraints, limited resources, and competing priorities. The accuracy of the data obtained from Forms 8938 is a critical component for the success of the IRS’s compliance activities with implementing the FATCA. As such, TIGTA believes that the IRS should make these programming changes a priority.

Lexis Guide to FATCA Compliance – 2015 Edition

1,200 pages of analysis of the compliance challenges, over 54 chapters by 70 FATCA contributing experts from over 30 countries. Besides in-depth, practical analysis, the 2015 edition includes examples, charts, time lines, links to source documents, and compliance analysis pursuant to the IGA and local regulations for many U.S. trading partners and financial centers. The Lexis Guide to FATCA Compliance, designed from interviews with over 100 financial institutions and professional firms, is a primary reference source for financial institutions and service providers, advisors and government departments. No filler of forms and regs – it’s all beef ! See Lexis’ order site – http://www.lexisnexis.com/store/catalog/booktemplate/productdetail.jsp?pageName=relatedProducts&prodId=prod19190327

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Texas A&M University School of Law announces the hiring of Dr. Chris Odionu as the Director of
Distance Education Programs and adjunct professor teaching project management. His prior positions include director of the System-Wide Center for Distributed Learning at California State University, chief information officer and associate professor of technology at Alabama A&M University. He also served as chief information officer at a number of institutions including University of Detroit Mercy, St John’s University in Jamaica – Queens, New York, and the Minnesota Community College System at Normandale Community College.

“Chris’ multi-disciplinary reach of engineering, IT, project management and a doctorate in education is going to propel Texas A&M Law’s pedagogical approach to the frontier for career based law programs, said William Byrnes, Executive Professor and Associate Dean. “By example, Texas A&M’s Business Law focus is to mentor the Aggie to add value and generate revenue. The process requires the Aggie to learn a business by studying its language, its industry, and commonalities among all business such as supply chain and project management. Dr. Chris Odionu is a distinguishing hire by a law school because he brings these perspectives to the table.”

“I am excited joining the TAMU School of Law and working with Professor Byrnes to establish world-class graduate law programs,” replied Dr. Odionu. “It is interesting to see law schools finally using the strengths offered by technology to deliver courses and degree programs online.”

Chris is a fellow of the American Academy of Project Management (AAPM), and certified in the governance of enterprise information technology, and in risk and information systems control (CRISC). He received his bachelor’s degree in technology, MBA, and doctorate in educational technology and administration from the University of Houston. He served as an administrative fellow in a year-long academic program at Harvard University where he earned a certificate in administration.

“Chris’ hands-on understanding of big data and data warehouse techniques combined with his background as an associate professor of information systems is going to distinguish Texas A&M’s curriculum, particularly in tax and business,” added Andrew P. Morriss, Dean and Anthony G. Buzbee Dean’s Endowed Chair. “His background will also immediately translate into a project management course for law students and lawyers, which is fast becoming a crucial skill for lawyers. And he will be providing a unique exposure for our students to the best practices in tax risk management.”

Chris has two children – Janelle, a student at Cornell University, and Christian, Jr., who plays high school basketball.

European Union (EU) Ministers for Economy and Finance met in Luxembourg for an ECOFIN Council chaired by the Luxembourg Minister for Finance Pierre Gramegna. The Ministers expressed their political agreement on a proposed Directive on the automatic exchange of information (AEI) on tax rulings.

On the basis of a compromise agreement brokered by the Luxembourg Presidency, the Council expressed its political agreement on a proposed Directive designed to improve transparency in the context of advance cross-border tax rulings, by making their automatic exchange between tax administrations compulsory.

The proposed Directive [Download EU AEOI TP] is part of a series of measures presented in March 2015 which aim to prevent tax avoidance and aggressive tax planning by companies. It aims to modify Directive 2011/16/EU on administrative cooperation in the field of taxation, which defines the practical terms and conditions for exchanging information in order to include advance tax rulings. The Directive requires Member States to proceed with AIE in the field of advance cross-border tax rulings, as well as advance pricing agreements. The Commission will implement a secure central directory, accessible to all Member States and the Commission, where the information exchanged will be stored.

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Senior members from the OECD’s Centre for Tax Policy and Administration (CTPA) commented on the final outputs of the OECD/G20 Base Erosion and Project Shifting Project, including the next steps and the involvement of developing countries. See yesterday’s post with the download link for each BEP report: OECD Releases All Final BEPS Reports – Links Herein

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The OECD presented today the final package of measures for a comprehensive, coherent and co- ordinated reform of the international tax rules to be discussed by G20 Finance Ministers at their meeting on 8 October, in Lima, Peru. The OECD/G20 Base Erosion and Profit Shifting (BEPS) Project provides governments with solutions for closing the gaps in existing international rules that allow corporate profits to « disappear » or be artificially shifted to low/no tax environments, where little or no economic activity takes place.

Revenue losses from BEPS are conservatively estimated at USD 100-240 billion annually, or anywhere from 4-10% of global corporate income tax (CIT) revenues. Given developing countries’ greater reliance on CIT revenues as a percentage of tax revenue, the impact of BEPS on these countries is particularly significant.

“Base erosion and profit shifting affects all countries, not only economically, but also as a matter of trust,” said OECD Secretary-General Angel Gurría. “BEPS is depriving countries of precious resources to jump-start growth, tackle the effects of the global economic crisis and create more and better opportunities for all. But beyond this, BEPS has been also eroding the trust of citizens in the fairness of tax systems worldwide. The measures we are presenting today represent the most fundamental changes to international tax rules in almost a century: they will put an end to double non-taxation, facilitate a better alignment of taxation with economic activity and value creation, and when fully implemented, these measures will render BEPS-inspired tax planning structures ineffective,” Mr Gurría said.

Undertaken at the request of the G20 Leaders, the work to address BEPS is based on the 2013 G20/OECD BEPS Action Plan, which identified 15 actions to put an end to international tax avoidance. The plan was structured around three fundamental pillars: introducing coherence in the domestic rules that affect cross-border activities; reinforcing substance requirements in the existing international standards, to ensure alignment of taxation with the location of economic activity and value creation; and improving transparency, as well as certainty for businesses and governments.

The OECD will present the BEPS measures to G20 Finance Ministers during the meeting hosted by Turkey’s Deputy Prime Minister Cevdet Yilmaz on 8 October, in Lima, Peru.

Following delivery of the BEPS measures to G20 Leaders during their annual summit on 15-16 November in Antalya, Turkey, the focus will shift to designing and putting in place an inclusive framework for monitoring BEPS and supporting implementation of the measures, with all interested countries and jurisdictions invited to participate on an equal footing.

The final package of BEPS measures includes new minimum standards on: country-by-country reporting, which for the first time will give tax administrations a global picture of the operations of multinational enterprises; treaty shopping, to put an end to the use of conduit companies to channel investments; curbing harmful tax practices, in particular in the area of intellectual property and through automatic exchange of tax rulings; and effective mutual agreement procedures, to ensure that the fight against double non-taxation does not result in double taxation.

The BEPS package also revises the guidance on the application of transfer pricing rules to prevent taxpayers from using so-called “cash box” entities to shelter profits in low or no-tax jurisdictions, and redefines the key concept of Permanent Establishment, to curb arrangements which avoid the creation of a taxable presence in a country by reliance on an outdated definition.

The BEPS package offers governments a series of new measures to be implemented through domestic law changes, including strengthened rules on Controlled Foreign Corporations, a common approach to limiting base erosion through interest deductibility and new rules to prevent hybrid mismatch arrangements from making profits disappear for tax purposes through the use of complex financial instruments.

Nearly 90 countries are working together on the development of a multilateral instrument capable of incorporating the tax treaty-related BEPS measures into the existing network of bilateral treaties. The instrument will be open for signature by all interested countries in 2016.

The BEPS measures were agreed after a transparent and intensive two-year consultation process between OECD, G20 and developing countries and stakeholders from business, labour, academia and civil society organisations.

“Everyone has a stake in reversing base erosion and profit shifting,” Mr Gurria said. “The BEPS Project has shown that all stakeholders can come together to bring about change. Swift implementation by governments will ensure a more certain and more sustainable international tax environment for the benefit of all, not just a few.”

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Medicaid compliant annuities can play a powerful role in a client’s long-term care plan if used carefully so that the client does not run afoul of the strict Medicaid resource rules. Clients have often purchased these annuities only to find themselves challenged on the grounds that the annuities represent available resources that can prevent Medicaid eligibility.

In recent weeks, however, a Third Circuit appeals court has taken an important step toward ensuring that long-term care expenses can be met using annuities—even if the annuity in question is a short-term annuity purchased specifically to cover expenses incurred during periods when the client is ineligible for Medicaid coverage.